Implementing a bold move, the Swiss National Bank announced plans to impose a currency ceiling on the Swiss franc on September 6th.  This is the first time in more than 30 years that such a measure needed to be put in place.  During that year, the Swiss government required a currency ceiling in order to stem gains against the then German Deutsche Mark.

But, now it seems that central banker’s are committed to a “substantial and sustained weakening of the franc” and are no longer willing to “tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs.”

As can be expected, the announcement supported one of the fastest moves in the EURCHF and USDCHF exchange rates in the overnight session – with both pairs vaulting higher by almost 1,200 pips or almost 11% in a matter of hours.  The EURCHF is trading at 1.2026, while the USDCHF trades at 0.8483.

Source:  FXAlliance Charts

This recent announcement by the SNB shows nothing but desperation on the part of policymakers as the Swiss franc’s rise – against both the US dollar and Euro – continues to remain a concern for the economy.  Even as policymakers have thrown everything they have at the currency, the Swiss franc continues to remain overvalued – by almost 41% according to calculations by the Organization for Economic Cooperation and Development.

And the effects of overvaluation are obvious.

Although exports and manufacturing growth have been strong in recent quarters, it seems that case for further growth in both sectors is beginning to weaken – and likely to pose additional problems down the road.  Export growth has been on a notable decline since the beginning of the summer, with the country’s exports to its EU trading partners dropping by almost 15% in June.  The precipitous drop off has caused many exporters and manufacturers to consider further price cuts in inventory in order to retain market share against its competitors.

Unfortunately, sector weakness has additionally prompted downward revisions in growth.

Back in the beginning of the summer, Swiss government officials reiterated a 2% pace of growth for the Swiss economy for 2011.  But, next year’s forecasts were revised lower, with officials stating that an  overvalued currency is likely to take away from short term growth.  As a result, estimates were for a 1.5% rate of growth – from the previous 1.9%.

A costly effort, today’s announcement could give way to some short term weakness in the franc.  But, for the SNB to win out, market conviction needs to be there.  And, this may take some time.

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